As a closet introvert, I surprised myself with attending and organizing a dozen conferences and events in 2017. The goal of my journey was not only to continue to build 3DHEALS community but also to figure out how 3D printing startups can take off in healthcare. WSGR’s 2017 Medical Device Conference on June 21st, 2017 was memorable. An array of VCs, investment banks, and entrepreneurs with different strategies and styles participated in discussions that most medical device startups and investors should care about. At the end of the day, it seems to be an artful balance of risk assessment, mining opportunities, and occasional contrarian behaviors.
(My memory is biased and my knowledge is limited, so please read with caution.)
Some bullet points to take away:
1. Current Investment Environment for Medical Device Startups:
It is tough.
· Not much funding: While digital health is receiving increasing venture money, medical device industry is at the nadir of its fundraising. Many investors have gotten burned in the past with investing in early-stage medical device and therapeutics because these startups typically require overcoming regulatory, clinical, and reimbursement hurdles, and therefore, an extended period of financing.
· Pre-regulatory approval and pre-data-stage startups. There is a trend that many medtech investors have shifted away from pre-regulatory approval or pre-data-stage medical device companies. However, this may not universal to all investors, according to NEA partner’s recent interview. [Ref]
· Upside: The other side of the coin is that this could mean less risk to future investors by getting better deals and higher quality of companies to invest in.
2. “Seedable” Characteristics of a MedTech Startup:
(Photo: 3DHEALS2017 Pitch competition)
Some obvious (even to me), others not.
· Strong Patent (IP): The importance of strong IP is worth stressing since this will dictate the “seedability” and valuation of a medical device company. Some investors mentioned that if the IP is strong enough to be licensed to other companies, that would add credibility to the underlying technology of the fund seeking startup. International IP is also important since it will allow wider market opportunities. Companies need to know different IP agencies work with different efficiencies and styles. (i.e. Apparently, getting an IP in Europe is super slow.) An important term to know for startups, “free to operate”, is written here by WIPO.
· Regulatory approval/clearance: Many investors at the conference expressed the importance of having one regulatory box checked before considering funding a medical device startup. Some investors are also open to seed a company based on a well-defined regulatory approval strategic plan and reimbursement plan. This regulatory requirement for funding is particularly challenging to healthcare 3D printing startups, where the regulatory path remains unclear since the technology is so new. Also, typically 3D printed medical device involves a combination of new software, hardware, and materials. None of which are well known to the regulatory agencies. A recently finalized guideline on 3D printed medical device from FDA is a very positive step forward, and you can read it here.
· Self-financing: Under a tough fundraising environment, a clear reimbursement plan will be helpful, but the world “self-financing” is now on the table, which could make one cringe. Some companies survived because they could self-finance through many years of research and development and the long process of getting regulatory clearance. In our space of healthcare 3D printing, I know of one such company as a success story. This could lead to the next point.
· Platform based product rather than single-product company. This goes back to the investors’ preference to de-risk as much as possible. Therefore, a portfolio of diverse products and a platform for growing partnership and vertical integration mean a larger future market share and a better investment opportunity.
· Market product fit.
· Prototype (MVP) ready.
· Clear exit strategy. IPO or M&A.
· Good (>50%) profit margin.
3. Where to Find Money:
(Photo: 3DHEALS2017, Anatomics 3D printed medical models)
· Angel: seems to become a major funding source for early stage medical device companies. It should be an important early discussion to have about the prospect of the angel’s investment, that is, it may never generate any return. Many existing angels invested in medtech companies on emotional and humanitarian bases. Needless to say, it is worthwhile for early-stage companies to spend time on curating a network of high net-worth individuals.
· Venture Capital funding: Again, tough but not impossible. Some investors made an analogy between investor/company relationship and “marriage”, which is not inappropriate.
· Government grants: Getting a government grant also establish credibility.
· Corporate financing: There is a trend of increased investment from established companies and large healthcare systems to invest in early medtech companies. The motivations behind these investments may include:
- Increasing market share at a lower cost
- Solving unmet clinical needs
- Lowering cost to operate
· Incubators and accelerators: surprisingly, some panelists did not think of these as “valuable”. They think that incubators and accelerators’ main role is to put entrepreneurs in front of other investors.
· Strategic partners: Having strategic partners can be very beneficial to an early-stage company. Partner companies can obviously leverage each other’s marketing and sales force. This is especially favorable to the smaller company of the two in the partnership. But several things to remember:
- If the win-win situation is not glaringly obvious to both partners, then the partnership will fail down the line.
- Larger corporate partners don’t always clearly know what they want from partnerships. So perhaps, it is up to the startup to define a clear vision, timeline, and milestones.
- Majority of medtech companies exit by merger and acquisition, which often occur after strategic partnership.
· Self-financing: It is true that I don’t need to write this section, but the devil is in the details. It is fun and worthwhile to study how other companies “self-finance” to survive the rough waters before an exit. Creative business plan to generate a steady revenue from existing businesses to support R&D is way one I have observed to work, but I suspect there are others and would like to learn about them.
· Don’t be depressed. I can’t think of anyone who succeeded without challenges. At the end of the day, innovations in healthcare aim to achieve the most meaningful goal in life.
· Healthcare 3D printing (H3DP) companies belong to a different species, but most investors (me included) don’t have enough insights or data to understand it well. The word “3D printing” and “medical device” give people the impression that these startups are all about hardware and physical devices, but I suspect that a good H3DP company should also have a robust software solution, sound material selection (i.e. biocompatibility), and well-defined manufacturing process underlying their physical product if there is one. The digital and material solutions can very well be the new “platform” technologies that investors are looking for.
· The risk in investing H3DP is “infinite” because most of us (including the policymakers) are still in search of a reasonable regulatory pathway. One that is not overly strict to kill most startups and one that is safe and effective to the patients. The map is getting clearer as I observed some efforts from the government, companies, and organizations in better defining the risks and solutions of these risks.